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Petar Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1986), Ch. 9, 305-332. Reproduced with permission of Oceana Publications.

General Principles of European Contract Law

Ulrich Drobnig
Professor of Law, Hamburg

Introduction
I.   The Significance of General Principles of Contract Law
      1. General principles of law in general
      2. General principles of contract law and the unification of aspects of contract law
      3. General principles of contract law as lex contractus
II.  The Source of General Principles of European Contract Law
III. Freedom of Contract
IV. Conclusion of Contract
V.  Validity of Contract
      1. The binding effect of contractual promises
      2. Defects of consent
      3. Illegality and immorality
VI. Breach of Contract in General
      1. The concept
      2. Responsibility or breach
VII. Enforced Performance
      1. Performance in natura
      2. Judicial penalties
VIII. Damages
      1. General function
      2. Damages as compensation for loss

a) Damages exceeding the loss
b) Limits of recovery derived from the conditions of the non-performing party
c) Limits of recovery derived from the conditions of the aggrieved party
      3. Interest
IX. Termination of the Contract
      1. Prerequisite
      2. Consequences

INTRODUCTION

This contribution does not directly deal with the international sale of goods, the central theme of this book. Specifically, it does not deal with those "general principles on which it [the Vienna Sales Convention] is based"; these general principles of the Convention are to serve as a yardstick for solving those matters which, though governed by the Convention, are not expressly settled in it.[1]

What, then, is the relevance of general principles of contract law, generally speaking and for the international sale of goods in particular?

I. THE SIGNIFICANCE OF GENERAL PRINCIPLES OF CONTRACT LAW

1. General principles of law in general

The distinction between specific legal provisions and general principles of law is probably as old as legislation. It is bound up with such basic divisions as the Roman distinction between leges land jus, or the general distinction between [page 306] law and justice. The Vienna Sales Convention, Art. 7(2), also uses this division. This is not the place to go into the historical or theoretical details of this general distinction.[2]

Nor shall we deal here with the status and significance of general principles of law in individual legal systems, such as "socialist legality" in the Socialist countries of Eastern Europe,[3] the "principles of Islamic law" in certain Islamic countries,[4] or "good faith and fair dealing" in Western legal systems.[5]

It is worth noting that "general principles of law" are particularly relevant for supranational and international legal systems. The most prominent example is furnished by public international law; one of its sources are the "general principles of law recognized by civilized nations";[6] in the absence of express provisions in treaties this source is of major practical significance. Important illustrations on the supranational level are to be found in the law of the European Communities. The Treaty instituting the European Economic Community provides in Art. 215(2) that the tort liability of the Community must be determined by the "general principles of law of the member states"; the European Court of Justice has had frequent occasion to develop general principles in this area of law. Without any statutory basis at all, this Court has also attempted to introduce a system of basic rights for the citizens of the Community. Here again, the court has strived to develop general rules based upon the systems of fundamental rights of citizens recognized in the member states of the Community.[7]

Our concerns here will be more specific: What is the relevance of general principles of contract law, first, for the unification of law, and second, for the application of law? [page 307]

2. General principles of contract law and the unification of aspects of contract law

The unification of law proceeds spontaneously, without any overall planning, by very different sponsors and at various political levels. Efforts have concentrated so far on certain types of contracts, especially in the field of transportation: The contract for international carriage by rail has been unified for Western Europe, on the one hand, and for Eastern Europe, on the other hand.[8] The contract for the international carriage of goods by road is regulated in another instrument, which has been elaborated by another sponsor.[9] The Warsaw Convention of 1929 with subsequent amendments governs international air transportation and is "administered" by the International Civil Aviation Organization.[10] Various aspects of contracts for international maritime transport are regulated by a number of instruments, most of which have been elaborated by the International Maritime Committee, some recent ones by the Inter-Governmental Maritime (Consultative) Organization (IMCO, now IMO), a body attached to the United Nations.[11]

In the field of sales, we have the truly universal effort of the Convention for the International Sale of Goods of 1980 (CISG), the potentially universal Uniform Law of Sales of 1964 (ULIS) and, at the regional level, the "General Conditions for Deliveries of Goods" of the member countries of the Council for Mutual Economic Aid (CMEA or Comecon) of 1958, with subsequent revisions.[12]

The record of individual sponsors is not better. The Council for Mutual Economic Aid, where one may expect the highest degree of planning, has regulated four types of contracts: for delivery [page 308] of goods, i.e., sales; for installation of plant and machinery; for repair of machinery, tools and equipment; and for cooperation and specialization of production.[13] On the other hand, the European Communities are in the course of elaborating harmonized rules on insurance contracts, on door-to-door contracts and on certain credit transactions of consumers,[14] inter alia.

What we see at the universal level and at the regional level is rather unsatisfactory: It is a conglomerate of uniform instruments governing a few individual types of contracts; and this conglomerate is more often than not quite incoherent. Occasionally it consists only of fragments, sometimes regulating no more than individual contract clauses, such as penalty clauses,[15] or a specific form of conclusion of a contract, such as door-to-door contracts.

None of these unified rules on certain types of contracts or aspects of contracting can and does offer exhaustive rules on contracts. They usually do not cover the problems of substantive validity, of contracting through agents, of assignment, of special aspects of performance, etc. All uniform rules are fragments, some more and most less complete; but nowhere is there a complete code of contracts. It is a function of general principles of contract law to fill the gaps existing within the various individual pieces of unified contract law. This function is particularly important for the larger authorities drafting uniform legislation, such as regional organizations. They also require a guideline for coordinating future drafting efforts. [page 309]

3. General principles of contract law as lex contractus

General principles of contract law may also serve directly as a source of law. This occurs when the parties agree upon them as governing their contract.[16]

It is true, such choice-of-law clauses are not very frequent; especially, they hardly ever occur between private parties. By contrast, such clauses sometimes do occur in major agreements between a state (or a state enterprise) and a foreign enterprise, often a multinational company. Thus, a number of concession agreements for the exploration and exploitation of oil resources in Arab speaking countries contain a choice-of- law clause stipulating that the agreement be subject to, and governed by, the "general principles of law" or "the principles of law normally recognized by civilized nations in general."[17]

It must be noted, however, that the validity of a choice-of-law clause referring to "general principles of law" is not entirely beyond doubt. There are writers who would regard such clauses as invalid because their contents are too vague.[18] On the other hand, several arbitrators [19] and writers [20] have confirmed the validity of such clauses, at least for agreements between a state and a foreign enterprise.

I should mention one further function of general principles of contract law, a pedagogical one: General principles, by virtue of their being abstracted from details, may be of considerable assistance for the student. They help to give a bird's eye view of a complex area of law; and contract law, in many respects, is quite complex since it is designed to cope with a vast number of extremely different transactions. [page 310]

II. THE SOURCE OF GENERAL PRINCIPLES OF EUROPEAN CONTRACT LAW

It is almost of the essence of "general principles of law" that they are not laid down by any legislative action (supra I.1.). They are nowhere readily formulated -- rather they have to be elaborated.

The process of elaborating general principles of contract law is the same as that employed to elaborate any other general principles of law: It is by a comparison of national systems of contract law.[21]

The general principles of contract law which I shall discuss here are qualified as being "European". This requires some explanation. I shall base my discussion primarily on some of the major West and Central European systems of contract law, especially English, French and German. I am less familiar with the East European legal systems; they will, therefore, be dealt with only marginally. Moreover, for the sake of comparison, my attention will focus on the foreign trade contracts of the Socialist countries; both the economic function and the legal regulations of this particular type of contract appear to be closest to the general West European type of commercial contract.

We shall shortly explain the underlying economic reason (infra III.). The other two types, i.e., civil law contracts with citizens and between citizens and especially plan contracts are more peculiar to the special conditions of the East European countries. They are therefore less suited to serve as bases for the elaboration of general principles of European contract law. [page 311]

III. FREEDOM OF CONTRACT

The first and supreme principle of European contract law is the freedom of the parties to contract. The freedom of contract has three distinct aspects: Each party is free to decide whether it wishes to contract at all; with whom it wishes to contract; and on which terms it is willing to contract.

Freedom of contract in its three aspects is the basic principle of European contract law because it expresses on the legal level the basic economic system, namely that of the market economy. The economic system of the market economy rests on the assumption that every citizen is best qualified to determine for himself whether he needs supplies or wishes to sell, who will best serve his needs and on what conditions. If all these three decisions are to be made by every individual for himself, he must be granted freedom of contract as to whether at all, with whom and on what terms he wishes to contract.

The economic rules of the market economy govern the foreign trade even of the Socialist countries; this is why it is justified to include the regime for foreign trade contracts of the Socialist countries among the bases of comparison from which general principles of European contract law can be drawn (supra II.).

The context between freedom of contract and a system of market economy is best proved by contrasting these twin principles with the opposing two principles, a planned economy with planned contracts. In the so-called economic contracts of the Socialist countries the supreme principle is the plan. The dominating role of the plan, though, is mitigated in current practice by systems of moderate planning which leave considerable [page 312] autonomy to the state enterprises and therefore also some degree of freedom of contract.

Although a basic principle, freedom of contract as such is rarely spelt out in legislation. On the level of uniform law, freedom of contract is usually expressed only in provisions allowing the parties to exclude the uniform law or to derogate from any of its provisions.[22]

IV. CONCLUSION OF CONTRACT

Few general principles are more firmly established than the basic rules on the formation of a contract. The well-known mechanism of offer and acceptance is recognized everywhere in Europe: A contract is concluded if one party's offer is accepted by the other party.

A very detailed, broad and careful comparative study has been devoted to this subject; it has elaborated 26 general rules on individual aspects of the formation of contracts.[23]

The existing uniform rules on international sales of goods contain, or are supplemented by, uniform rules on the formation of such sales contracts. All of these uniform rules are also based upon the idea of offer and acceptance.[24]

There is thus an exceptionally broad area of agreement as to the principles governing the formation of a contract. For present purposes, this conclusion must suffice. It may merely be noted in passing that the general principles on the formation of a contract by offer and acceptance are not free from doubt in certain marginal situations, for instance, if one party contracts under standard conditions. [page 313]

V. VALIDITY OF CONTRACT

In the related field of validity of contracts, the situation is quite different. The difficulties in this area are due in part to the legal complexities and to divergent social policies, in part also to conceptual complications. Let me try to clarify at least the basic issues although, in many respects, agreement on the solutions is not yet in sight.

The problems of validity of contract may be subdivided into three separate issues: first, the binding effect of contractual promises; second, defects of consent; and third, illegality and immorality. I shall briefly comment on each of these three issues.

1. The binding effect of contractual promises [25]

In the legal systems of the world one may find two approaches with respect to the binding effect of contractual promises: Some countries use internal criteria in order to determine the binding nature of contractual promises, whereas other countries take into account external factors.

The first group comprises the German-speaking, the Scandinavian and probably also the East European countries. Here a contractual promise is binding on the promisor, provided only it is intended by him to be legally binding. Whether the latter intention is present, is to be ascertained by interpretation of the promise. Unilateral legal acts, such as an offer to conclude a contract, are therefore, as a rule, binding upon the author. Sometimes, however, the law interferes by imposing certain conditions, especially a form requirement, e.g., for the promise to make a gift. [page 314]

By contrast, in many other countries the binding nature of a contractual promise depends upon the presence of an external factor called cause in the Romanic world and "consideration" in the Anglo-American orbit. Although the details vary considerably, in the present context [26] the contents and the functions of cause and "consideration" can be reduced to the following rule: A contractual promise is binding if there is a counter-performance by the other party or the promise of such a counter-performance.

Consequently, it is certain that at least a bilateral contract imposing obligations on each party, such as a sales contract, is valid.

On the other hand, unilateral promises, such as an offer or a modification of a sales contract affecting the obligations of only one of the parties are, as a rule, not binding. Consequently, provisions like Art. 16(2) and Art. 29(1) CISG which recognize the irrevocability of an offer in certain circumstances and the power of the parties to modify a contract by "the mere agreement of the parties" are deviations from the common law of the anglophone and the francophone countries.

The general principle which can be formulated as to the binding character of a contractual promise is narrow in theory although broad as to its practical implications. It reads: Contractual promises in a contract providing for mutual obligations of both parties are binding.

2. Defects of consent [27]

The validity of contracts may also become doubtful by the presence of defects of consent, such as mistake, fraud or duress. [page 315]

In the recent past, UNIDROIT in Rome, one of the major agencies for the academic preparation of a broad unification of private law, has launched some efforts of comparative analysis in this field. These comparative efforts first resulted in a draft on uniform rules relating to the substantive validity of international sales contracts.[28] After UNCITRAL decided not to include these rules in its proposals for a new uniform sales law, UNIDROIT reconsidered and has generalized these rules so as to make them applicable to international contracts of any type.[29]

The general principles elaborated in this field deal with the grounds, the procedure and the effects of avoidance. Suffice it to say here that the principles strive to restrict the grounds for avoidance by admitting avoidance only if the other contracting party knew or ought to have known of the defect, or if it has caused the defect of consent.

It should be mentioned that the term "avoidance" in this context has a meaning which differs from the meaning in which CISG uses the same term in various provisions.[30] In the context of defects of consent, "avoidance" means according to all European legal systems that a contract becomes void ex tunc. In the context of the uniform sales laws "avoidance", by contrast, means that a contract is terminated ex nunc. This confusion of terms is quite unfortunate; it is due to the fact that different sponsors have elaborated the various texts: and it illustrates at the same time the need of general principles as an instrument for discovering inconsistencies between various international instruments. [page 316]

3. Illegality and immorality

Before dealing with the substance, a systematic observation is in order. Most legal systems deal with illegal and immoral contracts tel quel, i.e., under the heads of illegality and immorality.

Not so the Romanic countries. There, the peculiar institution of cause fulfills also the function of invalidating illegal and immoral contracts.

The method by which this is achieved is well demonstrated by French law. Code civil Art. 1108 mentions four requirements for a valid contract, the fourth being "Une cause licite dans l'obligation". And Art. 1133 then provides that

"La cause est illicite, quand elle est prohibée par la loi, quand elle est contraire aux bonnes moeurs ou à l'ordre public."

Thus, a contract with an illegal or immoral cause is treated, in effect, in the same way as an illegal or immoral contract.

As to substance, two issues arise: First, when is a contract illegal or immoral? And second, what is the effect of an illegal or immoral contract? It will be obvious that in this area generalizations are impossible. Prohibitions express moral convictions or social policies. It will be very difficult to find a common denominator for these basic values. This is true even within a regional association like the European Community -- except the provisions enacted by this Community itself which are binding upon all the member states. [page 317]

VI. BREACH OF CONTRACT IN GENERAL

After having dealt with three positive aspects of contracting, namely freedom, conclusion and validity of contract, I shall now devote several sections to breach of contract; first to the concept of breach of contract and then to its consequences.

1. The concept

Is breach of contract a unitary institution or is it merely a name which comprises several, but distinct cases of violating a contractual obligation?

A brief survey reveals that breach of contract as a unitary institution of contract law is not familiar to all legal systems. The concept as such is derived from Anglo-American law. But a unitary approach is also adopted in the Romanic legal systems; there it is called non-performance.

By contrast, German law and some legal systems inspired by it (such as Austrian and Swiss law) do not use a unitary approach. Instead they distinguish between the various causes of breach, especially between impossibility of performance, delay, and all other instances of breach; in addition, following Roman traditions, defects of individual goods are dealt with on a special basis. This system of splitting up breach of contract into several more or less separate institutions has proved to be quite inadequate in many respects because it gives rise to difficult problems of delimitation.

Under the impact of comparative law and the unification of sales law there is now a strong tendency in German academic writings to adopt the [page 318] unitary approach. Indeed, both the Uniform Sales Law and the Vienna Convention use the basic and unitary concept of "breach of contract".[31] The unity of the concept of breach of contract may therefore now be regarded as widely, although not yet generally accepted.

2. Responsibility or breach

In theory, two radically different systems confront each other: The Anglo-American principle of strict liability for any breach of contract, on the one hand, and the Continental principle that breach of contract presupposes responsibility of the non-performing party, on the other hand.

In practice, however, the opposition between these two basic approaches is considerably mitigated by concessions of both sides: Anglo-American law recognizes certain instances where the non-performing party, although he is strictly liable on principle, is nevertheless absolved from liability for a breach of contract. This is primarily achieved by implying in the contract limits of the non-performing party's contractual guarantee.

Nor do the Continental legal systems pursue their basic idea of requiring the non-performing party's fault in all cases. Important exceptions are the non-performing party's strict liability if he owes a generic performance (rather than a species) and the strict guarantee for defects of goods sold. Another important mitigation of the basic principle are (rebuttable) presumptions of responsibility for breach of contract.

Also the East European Socialist countries follow in essence the Continental approach. Penalty clauses which are obligatory for many instances [page 319] of breach of contract oblige the non-performing party to pay by virtue of such non-performance alone.[32]

On the other hand, damages only fall due if the non-performing party is responsible for the non-performance; but this responsibility is presumed.[33]

The uniform laws for sales essentially follow the Anglo-American theory of strict liability for breach of contract. The seller or the buyer is liable for breach of contract if he has not performed any of his contractual obligations, unless he proves that there was a ground for exemption from liability. A non-performing party is exempted from liability if the failure to perform was due to an impediment beyond his control that he could not be expected to have taken into account at the time of contracting or to have avoided or to have overcome its consequences.[34] The limit of contractual liability thus coincides with force majeure.[35]

Although there is a high degree of convergence in the direction pointed to by the uniform rules or sales, the existing divergencies between the different basic approaches are still considerable. It is not yet possible to formulate a general principle as to the non-performing party's liability for a breach of contract.

VII. ENFORCED PERFORMANCE

1. Performance in natura

If a party does not perform a contract although performance is possible, the question arises whether the other party may claim performance. Here again the world is divided between Anglo-American [page 320] law, on the one hand, and the continental legal systems, on the other hand.

Under Anglo-American common law, there is no claim for specific performance. However, equity has intervened and grants specific performance if the normal sanction of damages would be inadequate. This is so, e.g., if the goods sold are unique. The economic background of these rules is that the aggrieved party can ordinarily be expected to go into the market, acquire a substitute performance and liquidate the damages which he has sustained.

On the Continent, the sanctity of contract is regarded as implying the opposite principle, namely the claim for performance. Also the East European Socialist countries embrace the principle of "rea1 performance". However, the economic reasons for this identity of principles differ; consequently, also the application in practice of the principle is quite divergent.

In the market-economy countries, an aggrieved party, especially in commercial relations, usually will not bother with bringing a claim for performance, waiting to obtain judgment and then attempting to levy execution. This would be much too expensive in terms of time, effort and money. Rather, the aggrieved party will procure a substitute performance and then claim damages. In practice he thus will act like his brother in England or the United States. By contrast, the socialist principle of "real performance" is taken seriously in the Eastern European countries with strictly planned economies. For this, there are both political and economic reasons: Since in a planned economy contracts serve to implement plans, both the aggrieved party and the non-performing party would deviate from their planned tasks if the one does not perform and the other [page 321] does not insist on performance. Moreover, there is usually no functioning market at which the aggrieved party can procure a substitute performance.

In view of these economic factors and the practice which has developed as a result of them, a true dichotomy exists between market-economy countries, on the one hand, and planned-economy countries, on the other hand.

And yet, even the market-economy countries are still heavily influenced by the impact of their diverging basic approaches. This impact is so strong that the two uniform sales laws were unable to achieve harmony on this point. While both laws grant claims for enforced performance,[36] they reserve each Contracting State the power to refuse to enforce such a claim where enforced performance would be contrary to the lex fori.[37]

This reservation in favour of the lex fori must be regretted. An intensified comparative effort shows that it is well possible to work out a rule which covers all cases in which Anglo-American law refuses specific performance and where in the Continental market-economy countries the aggrieved party is not used to insist on performance in natura. This general principle provides:

1. Payment of money can always be demanded;

2. Any other performance may also be demanded, except where

a) there is factual or legal impossibility;
b) performance would involve the non-performing party in unreasonable effort or expense;
c) the performance consists of services or work of a personal character;
d) the aggrieved party may reasonably obtain performance elsewhere; or [page 322]
e) the aggrieved party does not require performance within a reasonable time after he knows or ought to know about the non-performance.

This general principle as to enforced performance covers, however, only market-economy countries; it is not relevant for Socialist countries with a strict planning regime. However, arbitration practice of the CMEA countries shows that at least in foreign trade the principle of real performance plays a minor role.[38]

2. Judicial penalties

Judicial penalties, like contractual penalty clauses, serve to reinforce a judicial order for performance. The penalty is to induce performance.

However, the European countries are divided as to the admissibility of a judicial penalty. In England, compliance with a decree of specific performance, as of any other decree in equity, can be sanctioned by a penalty for contempt of court. French courts have developed the astreinte, which was sanctioned by the legislator in 1972. The Benelux-countries have concluded a convention providing for the judicial penalty.[39] In England, the penalty is paid to the state treasury, whereas in the other countries it goes to the aggrieved party. In any case, it is not a kind of liquidated damages but is awarded in addition to the damages.

Germany and other West European countries do not accept a judicial penalty or only in very narrow limits. This aversion is based upon its penal character or, on payment to the aggrieved party, because the latter is then unduly enriched. [page 323]

VIII. DAMAGES

1. General function

The place and function of damages for breach of contract is complementary to the place and function of a claim for enforcing performance.

Where the latter claim is the primary remedy, as in the Continental market-economy countries (see supra VII.1.), a claim for damages can only be of secondary importance. Where, on the other hand, a claim for specific performance is, in principle, excluded -- as in the Anglo-American orbit -- damages are the primary remedy.

Treitel has well illustrated the difference between the two approaches. Under English common law an employee who is wrongfully dismissed by his employer cannot sue for the agreed remuneration but only for damages. These consist of the agreed remuneration. Continental laws, by contrast, would award the same sum, but as the agreed remuneration.[40] While the practical result will often be the same, the underlying theories are quite different.

In view of the general principle as to enforced performance at which we have arrived for the market-economy countries (supra VII.1.), we can also answer the question as to the place and function of damages for breach of contract. Since an aggrieved party can primarily claim performance in natura, damages are a secondary remedy. However, practically speaking, in view of the long catalogue of exceptions to the principle of [page 324] enforced performance, an aggrieved party will more often take recourse to damages than to specific performance. Thus, although a secondary remedy, damages will in effect be of great practical importance.

2. Damages as compensation for loss

In most legal systems it will be regarded as a truism to say that damages should compensate the loss of the aggrieved party -- neither more nor less. However, neither of these two apparently obvious rules is accepted everywhere.

a) Damages exceeding the loss

The rule that damages should not exceed the loss, while accepted by most legal systems is not followed by all. Anglo-American law sometimes awards damages beyond the aggrieved party's loss, especially nominal damages -- a symbolic compensation even if the aggrieved party has not suffered any loss; and sometimes multiple damages -- in order to coerce the non-performing party to perform. [41]

However, it would seem that these peculiarities of Anglo-American law are on the retreat. In particular, nominal damages were popular as a substitute for a declaratory action which formerly had not been, but now is being admitted.

b) Limits of recovery derived from the conditions of the non-performing party

While damages, generally speaking, may not surpass the aggrieved party's loss, more often they do not even reach it. Here, as elsewhere in most legal systems, the non-performing party [page 325] often is given special consideration. The limits of recovery are in part derived from the conditions of the non-performing party and in part from circumstances of the aggrieved party.

Most legal systems limit damages out of consideration for the non-performing party, and they do so by a great variety of techniques: By requiring that the non-performing party was at fault; or that he foresaw or could have foreseen the loss; or that he "adequately" caused the loss. In this context it is impossible to explain and compare all of these various approaches towards the limiting of damages; this has been done elsewhere.[42]

As is well known, the uniform sales laws have adopted the Anglo-American foreseeability test.[43] By contrast, the CMEA General Conditions for Deliveries combine the requirements of a causal connection and of fault on the part of the non- performing party.[44]

In view of the great diversity of approaches it is not yet possible to formulate a general principle as to the limits of recovery of damages derived from the conditions of the non-performing party.

c) Limits of recovery derived from the conditions of the aggrieved party

We shall now turn to those limitations of recovery which are derived from the conditions of the aggrieved party.

In this respect, two types of loss clearly stand out: The first is loss suffered by the aggrieved party which results from his own unreasonable behaviour or his failure to take reasonable steps to mitigate his loss. The second ground for limiting recovery is the presence of savings [page 326] or gains which result from the breach of contract.

These two heads of limiting the aggrieved party's loss and therefore of his compensation seem to be very widely recognized. The aggrieved party's burden of mitigating the loss is also expressly spelt out in the uniform sales laws.[45]

3. Interest

For the very frequent case of delay in payment of money, most legal systems have fixed as damages a lump sum called statutory interest. England is a lonely exception; but this has been criticized and the English Law Commission has proposed to introduce a statutory interest on contractual obligations to pay money. The duty to pay interest may therefore be regarded as a general principle.

Details, however, differ, especially the computation of the rate of interest. Also the question whether the creditor may claim additional damage is answered differently, probably because of the different rates of interest.

IX. TERMINATION OF THE CONTRACT

The third major remedy of the aggrieved party -- apart from enforced performance and damages -- is termination of the contract. For the reason mentioned earlier I avoid using the term "avoidance" here, thus deviating from the terminology of the uniform sales laws (supra V.2.). In some situations termination will be the only effective remedy, e.g., when the non-performing party is insolvent and can neither perform his obligations nor pay damages. [page 327]

1. Prerequisite

Today most lega1 systems agree in effect on the most important condition for allowing the aggrieved party to terminate the contract: The non-performance complained of must be of a serious nature. This criterion is expressed quite differently: English law requires breach of a condition and not of a mere warranty; in France where the contract, unless otherwise provided by the parties, can only be dissolved by judicial decision, the judge will not pronounce the dissolution unless there is a "grave reason"; in Germany, a main obligation of the contract, and not merely an incidental one, must be violated. The uniform sales laws express the same idea by distinguishing "fundamental" and other breaches of contract; only the former empower the aggrieved party to terminate the sales contract.[46]

CISG Art. 25 defines a fundamental breach of contract as follows:

"... it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result."

The difficulties of applying such a definition can fortunately be remedied to some degree by the German Nachfrist procedure: The aggrieved party may fix an additional period of time of reasonable length for performance; upon its expiry the aggrieved party may terminate.[47]

The expiry of the additional period of time fixed by the aggrieved party thus converts any breach into a fundamental breach. [page 328]

2. Consequences

Termination puts an end to the contract. The parties have to return what they had already received.

One consequence of termination deserves to be mentioned expressly: In most countries, despite his termination of the contract, the aggrieved party is entitled to ask for any damages which may be due. This rule has also been adopted in the uniform sales laws.[48]

However, German law regards the effect of termination as being so absolute as to withdraw the basis for claiming damages for breach of contract, namely the contract. Obviously, this dogmatic solution is not satisfactory in practice.

Here again, as in so many other instances, comparison with the laws and experiences of other countries helps one to obtain a critical view of his own law and suggestions for its improvement.


FOOTNOTES

1. Art. 7(2) CISG. See P. Volken, infra chapter two, p. 42.

2. For a recent historical and comparative survey cf. R. David, "Sources of law," International Encyclopedia of Comparative Law (I.E.C.L.) vol.II ch. 3 (1984) s. 19-38.

3. Cf. I. Szabo, "The Socialist Conception of Law," I.E.C.L. vol. II ch. 1 (1975) s. 98-105.

4. Cf. Art. 1(2) Civil Code of Libya.

5. Cf., e.g., the overwhelming role of Treu und Glauben in German law.

6. Cf. Art. 38(1)(c) of the statute of the International Court of Justice.

7. D. Feger, Die Grundrechte im Recht der Europäischen Gemeinschaften (1984); M. Dauses, "La protection des droits fondamentaux dans l'ordre juridique communautaire," 20 Rev. trim. dr. eur. (1984) pp. 401-424; P. Pescatore, "The context and significance of fundamental rights in the law of the European Communities," 2 Human Rights L.J. (1981) pp. 295-308.

8. Convention relative aux transports internationaux ferroviaires (COTIF) de 1980, Zeitschrift für internationalen Eisenbahnverkehr (1984) p. 33. CMEA: Accord concernant le transport international des marchandises par chemin de fer (SMGS) de 1966, in K. Zweigert and J. Kropholler, eds., Sources of International Uniform Law/Sources du Droit uniforme international/Quellen internationalen Einheitsrechts vol. II (1972) F 291; Agreement concerning International Passenger Traffic (SMPS) of 1966, in K. Zweigert and J. Kropholler, E 293.

9. Convention on the Contract for the International Carriage of Goods by Road (CMR) of 1956, in K. Zweigert and J. Kropholler II, supra n. 8 at E 280.

10. Convention for the Unification of Certain Rules Relating to International Carriage by Air of 1929, in K. Zweigert and J. Kropholler II, supra n. 8 at E 248.

11. F. Berlingieri, "Il comité maritime international, le sue origine, la sua storia ed il suo futuro," 81 Dir. mar. (1979) p. 148 et seq.; A. Xerri, "The Contribution of the Comité Maritime International to the Movement for the Unification of Maritime Law," Rev.dr.unif. (1977) II 87; S. Mankabady, ed., The Internationa1 Maritime Organization (1984).

12. For CISG see, e.g., J. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (Boston 1982). For ULIS cf. K. Zweigert and J. Kropholler I, supra n. 8, at E 137.

For the CMEA General Conditions for Deliveries of Goods of 1968, cf. ibid. at E 155.

13. For delivery of goods, cf. supra n. 12; for the General Conditions of Installation ... related to the Mutual Delivery of Machinery and Plant of 1962, cf. K. Zweigert and J. Kropholler I, supra n. 8, at E 153; for the General Conditions of Service for Machinery, Plant and Other Products of 1962, cf. ibid. at E 154; for the General Conditions on Specialisation and Cooperation in Production of 1979, cf. Gesetzblatt der Deutschen Demokratischen Republik 1979 II 50.

14. For the (amended) proposal of a Directive on door-to-door contracts of 1978, see O.J.E.C. (1978) no. C 127 at p.6. For the (amended) proposal of a Directive on Consumer Credit of 1984, see O.J.E.C. (1984) no. C 183 at p. 4.

15. Convention Benelux relative à la clause péna1e (1973 ).

16. For details and references see, e.g., R. Schlesinger and H.-G. Gündisch, "Allgemeine Rechtsgrundsätze als Sachnormen im Schiedsgerichtsverfahren," RabelsZ (1964) p. 5 with ample reference.

17. E.g., Art. XXIII (K) of the Petroleum concession Agreement between the Arab Republic of Egypt and several oil companies of 1975, in P. Fischer, A Collection of International Concessions and Related Instruments vol. I (1981) pp. 191, 294; Art. 7 (I) of the Supplemental Agreement Between the Government of Kuwait and BP (Kuwait) Ltd. ... of 1966: ibid. II (1982) pp. 192,199. For a recent instructive survey of contractual clauses see P. Weil, "Principles généraux du droit et contrats d'Etat," Le droit des relations économiques internationals. Etudes Goldman (Paris 1983) pp. 389-392.

18. F.A. Mann, "The Proper Law of Contracts Concluded by International Persons," 35 Brit.Yb.JInt.L. (1959) pp. 44,45; J. Verhoeven, "Droit international des contrats et droit des gens," 14 Revue belge dr.int. (1978/1979) p. 218; P. Weil, supra n. 17, at pp. 404-405, 410; W. Wengler, "Les principles generaux du droit en tant que loi du contrat," 71 Rev.crit.dr.i.p. (1982) pp. 484- 490.

19. B.P. v. Libya (1973), 53 I.L.R. (1979) pp. 328-329 per Lagergren; Texaco v. Libya (1977 ), 53 I.L.R. pp. 452-454 per Dupuy; LIAMCO v. Libya (1977), 62 I.L.R. pp. 175-176 per Mahmassani. See also the instructive survey by P. Weil, supra n. 17, at pp. 392-397.

20. Art. 2 of the Resolution of the Institut de Droit international of 1979, cf. 58 II Annuaire (1980) p. 192; K.-H. Böckstiegel, Der Staat als Vertragspartner ausländischer Privatunternehmen (1971) pp. 110-119, 374; J.-F. Lalive, "Contrats entre états ou entreprises étatiques et personnes privées," 181 Rec. des Cours ( 1983 III) ( pp. 47- 48, 103-104; Lord McNair, Q.C., "The General Principles of Law Recognized by Civilized Nations," 33 Brit.Yb. Int.L. (1957) pp. 7-10; H. Kipp, "Verträge zwischen staatlichen und nichtstaatlichen Partnern," 5 Berichte der Deutschen Gesellschaft für Volkerrecht (1964) pp. 182-188; K. Zweigert, "Verträge zwischen staatlichen und nichtstaatlichen Partnern" ibid. pp. 204-214; R. Schlesinger and H.-G. Gündisch, supra n. 16, at PP. 14,29, 30-31, 38-44; M. Virally, "Un tiers droit? Réflexions théoriques," Le droit des relations économiques internationales. Etudes Goldman (Paris 1983) pp. 382-385.

21. W. Lorenz, "Rechtsvergleichung als Methode zur Konkretisierung der allgemeinen Grundsätze des Rechts," Juristen-Zeitung (1962) p. 269.

22. CISG Art. 6; cf. ULIS Art. 3. Cf. CMEA General Conditions for Deliveries, preamble para. 2 which permits contractual modifications under certain broad conditions.

23. R. Schlesinger, Formation of Contracts 2 vols. (1968).

24. CISG Articles 14-24; GMEA General Conditions for Deliveries 1-4; ULFIS.

25. An excellent comparative discussion in K. Zweigert and H. Kötz, 2 An Introduction to Comparative Law (1977) p. 77 et seq.

26. We are not dealing here with the function of cause as a necessary element of a transfer of assets.

27. Cf. K. Zweigert and Kötz, supra n. 25, at p. 81 et seq.

28. I Rev.dr.unif.(1973) p. 60 et seq.

29. UNIDROIT Study L-Doc. 20 (1982).

30. CISG Articles 26, 49, 64, 81-84.

31. ULIS Articles 10, 26(1), 27(1), 28, 30(1), 32(1), 32(3) etc.; CISG Art. 25, title of sections III in chapters II and III, Articles 49(1)(a), 51(2) etc.

32. CMEA General Conditions for Deliveries 67 B(2)

33. CMEA General Conditions for Deliveries 67 D(1)(d), (3)

34. See especially CISG Art. 79(1); similarly ULIS Art. 74(1).

35. Cf. D. Tallon, "Réflexions comparatives," Les effets du contrat dans les pays du Marché Commun (1985) pp. 297 et seq., 302.

36. ULIS: Articles 24(1)(a), 26(1), 30(1), 41(1)(a), 42(1) etc. CISG: Articles 46, 51(1), 62.

37. ULIS: Art. 16 and Art. VII of the ULIS Convention; CISG: Art. 28.

38. See report on a conference of the presidents of the arbitration tribunals at the chambers of commerce of the member countries of the CMEA held in 1983, in 72 AW Recht im Aussenhandel (1984) pp. VII-VIII.

39. See supra n. 15.

40. G. Treitel, "Remedies for Breach of Contract," I.E.C.L. vol. VII ch. 16 (1976) s. 40.

41. Cf. Treitel, ibid. at s. 46-47.

42. Cf. the thorough analysis by Treitel, ibid. at s. 40-118.

43. ULIS Articles 82, 86; CISG Art. 74.

44. 67 D(1)(c) and (d), (2) and (3).

45. ULIS Art. 88; CISG Art. 77. Cf. also CMEA General Conditions for Deliveries 67 D(4).

46. CISG: Articles 49, 51(2), 64, 72, 73; ULIS: Articles 24(1)(b), 26(1), 30(1), 43, 45(2), 52(3), 55(1)(a), 62(1), 66(1), 70(1)(a).

47. 326 BGB. Uniform sales laws: CISG Articles 47, 49(1)(b), 63, 64(1)(b); ULIS Art. 27(2), 31(2), 44(2), 62(2), 66(2).

48. CISG Art. 81(1) (first sentence); ULIS Art. 78(1).


Pace Law School Institute of International Commercial Law - Last updated September 26, 2002
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